Saturday, January 24, 2009

The Hooey in Peak Oil

Here it is - someone has to explain this to me. Central part of "peak oil" is the graph above which shows the incremental cost of new oil.

Suddenly, out of the blue, incremental cost to make one more barrel of oil appear out of the ground moved, after decades, from sub $20 pre 2002 to just shy of $100? What happened in 2002, were the Saudi fields nukes? Did I miss that?

That's ridiculous. We can choose to make energy from bio-fuel or the $60 or so per barrel for Ft McMurry oil, but the least expensive incremental cost to make one more barrel of oil is still south of $20. And it will be so as as long as Russian and Middle East reserves are not depleted.

This chart above (er that part before 2002) also shows where oil is headed. Also shows the pain felt in many parts of Canada like Ft McMurry or Halifax yards servicing Hibernia....

This is all well and good, but as long as demand for oil declines the marginal cost of production of oil will fall as well because people will simply stop producing oil from marginal sources.

I don't think Chinese demand will be coming back any time soon, the American consumer is permanently wounded. I'm not sure where the "equilibrium" price is (if you believe in such things as equilibrium) but there's no reason for oil prices to increase as long a demand continues to drop and OPEC continues to cheat, which is to say, for the foreseeable future.

But the key word is "new." That incremental cost is for "new" supply that has been tapped such as deep water, shale, sands, etc. per tradefast's post. Any existing wells that are already producing output are not considered inccremental "new" supply. On another note, great blog post by Faust. I'm going to borrow the article he cited for a blog post tomorrow at greenfinconsulting.blogspot.com

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About Me

Many years of experience in being a market maker, a trader, a salesguy or portfolio manager in almost all asset classes known. Have had a high teens average career return and yet can say that I have lost more money in more asset classes than anyone I know.
My biggest curse is that not even wishing to become involved: "I see dead people.", as the kid said in the movie. I can smell a trade in the drawer or financial fraud or PL blowup miles away. Should have been with the FBI if wanted to max social utility.
Autodidact in all things math, formal education in history.